A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to
- Hire a professional investment manager, which theoretically offers the prospects of better returns and/or risk management.
- Benefit from economies of scale – cost sharing among others.
- Diversify more than would be feasible for most individual investors which, theoretically, reduces risk.
Terminology varies with country but collective investment vehicles are often referred to as mutual funds, investment funds, managed funds, or simply funds. Around the world large markets have developed around collective investment and these account for a substantial portion of all trading on major stock exchanges.
Collective investments are promoted with a wide range of investment aims either targeting specific geographic regions or specified industry sectors. Depending on the country there is normally a bias towards the domestic market to reflect national self-interest as perceived by policymakers, familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance and other factors such as fees.
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